Nine entities involved in the Indian impact investment landscape (i.e. picking up equity stakes in businesses that aim at both financial and social returns) have recently come together to form the Indian Impact Investor Council (IIIC).
Why Regulate Impact Investment?
The IIIC justifies the need of a central regulatory body by giving the example of the derailing of the microfinance industry in India three years ago. Between 2006 and 2010, various funds from venture capital and private equity poured into the Indian microfinance industry. This resulted in tremendous pressure to grow and caused companies to commit excesses and indiscretions while dealing with their underprivileged and impoverished borrowers. Vineet Rai, Managing Director of Aavishkaar Fund, one of the body’s founding members, states that “Microfinance did not have a self-regulatory body. We’ve seen the problems. Being accountable is a good thing, especially being accountable to ourselves.” and “The need for a self-regulatory organisation came from the experience of microfinance”.
The group’s objective is to define what impact investors can and cannot do in their investment practices. They are looking to organise impact investing in India in terms of both philosophy and structure and hope to increase the number of their members from the initial 9 to 30 by the end of the year.
In the current stage, IIIC members are still debating the standards and expect to take another year to finalise them. Several questions have not fully been answered yet such as: how to measure social impact, is it possible to have only one definition, which sectors qualify for impact investments, what should the minimum holding period be, etc. According to Sandeep Farias, Managing Director of Elevar Equity, which manages $94 million under two impact investing funds, states “We will be looking who really qualifies to be in this space as there are so many players today”. Rai further elaborates “We are looking at the economics of impact”. Their definition of an impact fund states that 100% of the portfolio needs to deal with low income.
IIIC will initially consist of nine members, including Aavishkaar, Elevar Equity and Unilazer Ventures, Omidyar and the family office of Ronnie Screwvala. The list of potential members contains large developmental financial institutions such as DFID, IFC and USAID and initial feedback is very positive. Anil Sinha, regional head, advisory services, South Asia, IFC sais “We will come in. No harm in supporting the council. It’s a good idea.”
However, the members need to be aware of potential problems. Harold Rosen, CEO of US-based Grassroots Business Fund, an impact-investing fund, warns that running a self-regulatory body like the IIIC can be highly complicated. The biggest concern he articulates is that it may be very difficult to prescribe general practices that all players are willing to accept.